Oriola Oyj (ORIOLA) Earnings Call Transcript

Good morning, everyone, and a warm welcome to Oriola's Q2 audiocast. I am Tua Stenius-Örnhjelm from Oriola's Investor Relations. With me today, I have our CEO, Katarina Gabrielson; and CFO, Mats Danielsson. We'll start with Katarina's presentation, followed by Mats' financial review. After the presentation, we open up for your questions. As a reminder, in the Q&A, we will focus on questions relating to Oriola's business and financial performance. Like always, you can start posting questions to us already during the presentation through the chat. Finally, please note that we are recording this audiocast and the recording will be available on our website later today. And before handing over to Katarina, here is the disclaimer that we all should be aware of. And now without further ado, Katarina, please go ahead.

Thank you, Tua, and welcome also on my behalf, and good morning. In Oriola, we could see a positive sales development in the wholesale business in Finland during the second quarter. This is a development that we have seen since the end of last year. So I'm really pleased to see that it has continued also in the second quarter. Also, the volumes in the specialty flows has been remaining on high levels. And in specialty flows, we see, for example, vaccine and export volumes going from Sweden as well as in Finland. We can also see that the demand for Oriola's pharmaceutical distribution services was somewhat weaker than anticipated during the second quarter. The profitability landed on last year's level despite that we have higher freight costs driven by increased fuel prices. We have taken measures during the quarter to mitigate the impact more effectively going forward, especially when it comes to the fuel prices. In quarter 2, the net sales was growing by 1.7% and landed on EUR 51.8 million and adjusted EBITDA was EUR 8.1 million, which was in line with last year's level. In the supply chain, I'm pleased to see that the operations remain stable, and we have made important improvements during the quarter that will make effects also -- positive effects going into the second half of the year. One example is that we have moved the vaccine distribution for the Northern Sweden from Gothenburg area to the Stockholm area, which means that we can take down the air freight and go with road transportation instead. That will eat up our costs and will also be positive for environmental footprint. Kronans Apotek delivered a quarter of revenue growth as well as the profitability has improved. This has been based on the execution of the short-term actions that we talked about earlier this year, but also about -- and also in the CMD. Kronans will now continue to execute on the commercial and operational improvement to further strengthen the profitability. In Oriola, we are continuing to replanning our ERP program, and we are taking into the learnings that we made with the first deployment in Sweden. We are in the design phase for the second deployment, and that's ongoing, and we'll continue more on this further when it's ready to be commented. If we then look at operating environment, our market share was stable, both in Finland and Sweden. But we could see that in the second quarter, the value of the pharmaceutical distribution market was growing in Sweden with around 10%, while the growth in Finland remained quite flat. We are affected by the geopolitical development that we can see during the quarter has continued to contribute to uncertain operating environments. One example is the higher fuel prices that I already have mentioned, but there is also some [ inflatory ] pressure. And like I said before, when it's coming to the fuel prices, we are taking actions to mitigate the higher fuel prices. The pharmaceutical companies is also continuing to building inventories in both Sweden and Finland, and that is to ensure that the availability in both markets, which is benefiting us positively since we have higher volumes to expect for the future. In Advisory Services, it continued to be cautious customers, and we can see that in the decision-making. There is longer lead times and there is also take more time than to get the contracts and the new engagements signed with customers in this area. And this is mainly based on what happened in the U.S. and how the product is then coming to the Europe. The consumer confidence indicator is weak in Finland as well as in Sweden. You could see some improvements during the end of the quarter. And like I said before also in this sessions, this is affecting mainly the traded goods and especially traded goods and over-the-counter products since this is the out-of-the-pocket spend for the customers in the pharmacies. It's also so that there will changes then from more expensive products to lower priced products. If we then look at our segments. The Service segment has a decline in the net sales with 2%. The decline is due to the weaker quarter, especially in the pharmaceutical distribution in Sweden, but also in Advisory Services. If you look at the pharmaceutical distribution part in Sweden, we have continued to see that the weight loss products has increased in volumes. And the increase here is based on that it's going to be parallel imported products in Sweden. And we are less strong in this customer portfolio, which is affecting the volumes in the distribution area in Sweden. But the volumes in the specialty flows, such as vaccine, exports and Animal Health remained high level for Oriola. And that is something we have seen for a while now, and we are expecting that to continue for the future. In Advisory Services, the restructuring -- we have taken restructuring measures based on the longer lead time with the contracts. And we have also, by that implemented to reduce the personnel costs, which will be positive for the second half. Adjusted EBITDA decreased in this segment to EUR 9 million, and the main reason for the decline was the high freight costs. Then going to the product segment. In this segment, the net sales was growing by 11% and landed on EUR 16.9 million. The growth was supported by both the wholesale and the dose dispensing business in Finland. We could see that the positive development in the wholesale business, like I mentioned before, has continued and it's supported by the growth both in the e-commerce as well as the retailers and in the pharmacy channels. The renewal of our own brands that we have talked about earlier during the year has progressed, and we can see that the renewal of the brands which we have done is now growing with -- in some areas with double digits. We can also see new listings that will contribute more in the second half of the year. The sales of the specialized medicines were also strong during the quarter, and we have succeeded in capturing market opportunities in this area, which is something we will continue to strive for. Adjusted EBITDA was EUR 1 million, and that's a small decline compared to last year, and that is mainly due to higher operating expenses. Let's now go more into the financial figures, and Mats will do some presentation. So please, Mats.

Thank you, Katarina, and welcome also from my side. I will start from the invoicing and net sales -- and this quarter was a bit softer than quarter 1. And if we start by looking at the invoicing for the quarter, of course, the main part of the invoicing is coming from the Service segment, where we had a low volume growth in the segment, still invoicing grew by 5.3%. If we then look at net sales, we had a growth of 1.7%. The low net sales growth is directly linked to the volume growth in the Service segment. Service segment is about 70% of net sales, and I will come back to that a bit more in the Services segment. If you look at the year-to-date numbers, pretty much the same development as in quarter 1. If we eliminate for the Swedish dose dispensing business, year-to-date, we have had a net sales growth of 3.5%, a bit better in the first quarter and now a bit softer in the second quarter. Looking at the EBITDA, we had stayed at the same level in the quarter as in '25. The EBITDA margin of 15.6% compared to 15.8%. Adjusting items a bit lower than last year. This is mainly due to the fact that we have been -- we are more in a planning phase than an execution right now, and we have used less consultants during the quarter. EBITDA year-to-date is slightly higher and the EBITDA margin also 15.5% compared to 15.3%. In general, if we look at the quarter 2 EBITDA staying flat. Of course, it's the volume growth that is lacking and that gives us the opportunity to grow profitability. Then we have some headwind in advisory, especially or both in the full H1. And then we have the -- like Katarina mentioned, we have some freight extra freight cost at the latter part of quarter 2. And then we have a bit -- we have more -- some more cost and not good enough pass-through margin on the product segment, and that affected the profitability to stay at the same level. Then if we move into the Services segment, here, we had a low volume growth. And as Katarina said, we had -- the growth was mainly coming from, for example, vaccines and exports and the invoicing growing 5.2% and 6.8% year-to-date. And then if we look at the net sales, this volume growth is directly impacting the net sales due to the fact that we have especially on the growing category, there was a transaction-related pricing, and that means that regardless of the price increases we get paid by the transaction volume. And then we have a headwind in the advisory that gives a small decline in the net sales and that compared to the growth still in the invoicing. Year-to-date, 0.7% growth in net sales. If we then look at the adjusted EBITDA, like Katarina said, we have the freight cost now hitting us as a delay in quarter 2. We also have the low net sales and the volume growth that is affecting the EBITDA. And then we have the slowness in the advisory business. So a slight decrease in profitability, both in the quarter and year-to-date. In the Products segment, we have a good development that continued from quarter 1. If we adjust for the Swedish dose dispensing business, we have 11% growth in quarter 2, but also with the correction, it's around 11% year-to-date. If we look at the adjusted EBITDA for the quarter, it was a bit a small disappointment not reaching the level of last year, some more cost operating expenses, some freight and then the pass-through margin was a bit lower than we had expected. Still year-to-date, we are well ahead of 2025, both in euros and in the EBITDA percentage that is 9.7% compared to 6.9%. Then if we look at the bridge for the net profit, we have improved the net profit and a few -- just a few highlights on that. As said before, we had some less adjusting items this year compared to last year. So the EBITDA was higher. Another thing is that last year, we had a write-down on the Swedish dose dispensing business that hit the depreciations. And then, of course, Kronans had a better first half year than last year. That gives us a loss of minus EUR 3.2 million compared to EUR 11 million last year, which is a clear improvement. Then we look at the cash flow, a few comments on the cash flow. We have the change in the working capital is minus EUR 35.2 million. Here, we have a few things that have happened. We have decreased one of the factoring customers in Sweden. We are using factoring for retail pharmaceutical retail chains, pharmacy retail chains, and we have now taken out one customer from that, which has had an impact that is roughly 1/3 of this minus EUR 35. Then from the customer mix, in the invoicing growth, we have had some impact on -- also on the change. But the main point here is that this is a kind of a normal volatility. We still have invoicing of more than EUR 300 million each month. So there's small and very large payments. So this will always fluctuate a bit. Then another point here is the other investments, EUR 7.6 million. This consists of the Järvenpää land area and then some automation in Enköping that we have also talked about earlier. If we look at the net debt minus EUR 35 million. If we compare this to the last year, without the sold receivables, we would be at the same level as we were last year. So no big change. Then the financial position, we have no big changes in gearing or equity ratio. Gearing as compared to last quarter is a bit lower due to the cash flow, but compared to last year, we are at quite the same level. Then if I look at Kronans, Kronans had a very good quarter. Net sales in local currency grew by 5.3% Kronans had some really successful activities in the pharmacies. They have had a good cost control. And if you look at the adjusted EBIT, we are -- we have now an improvement of more than EUR 4 million from last -- the quarter last year. And also, even though we had a quite -- Kronans had a quite bad quarter -- first quarter, we are now ahead of in the adjusted EBIT compared to last year. And then if we look at the outlook, we still -- we keep the same outlook as before. We expect the adjusted EBITDA to increase from the previous year, and this is very much related that we believe in a growing market and then the strategy execution and the actions that we have related to that. That was my part. Back to you.

Thank you, Mats. And if we go then for the key takeaways before we go to the questions, we will continue with the net sales growth, like Mats mentioned here in the product segments. And we can also see that the volumes in the specialty flows remains at a high level. And that is something that has been done during the quarter 2 and specifically and also going forward, we believe in this. The supply chain during quarter 2 remained stable despite operating environment uncertainties, as we can see and also some higher costs. And in the second half, the net sales growth and efficiency improvements is expected to continue. And one of our key priorities is the cost discipline, both to get the cost to the customers as well as looking at all the costs that we can work on in Oriola itself. So that's the key takeaways from the quarter. And now we open up for questions.

Great. So thank you, Katarina and Mats, for your presentations. And as a reminder, please use the chat to send in your questions. And in the Q&A, we will first focus on the questions relating to Oriola's business and financial development and then take the questions about the joint venture. So we already have quite a few questions in the chat, and I will do my best to group those questions that are relating to the same topic. So let's start with the first questions that we have received. So there are a few questions relating to the ERP program. So could you estimate what is the remaining amount of ERP costs to be booked as onetime costs? Has the original amount of ERP costs changed? And if yes, how much?

Yes. Like Katarina mentioned in the beginning, we are now -- have now been -- and I noted that also that we have taken the learning from the release one and now we have -- during the first and the second -- mainly the second quarter, we are now planning and designing the release two and that, of course, will have some impact, but we don't have any numbers to rely on yet. So that we'll have to come back on later.

Okay. And relating to the costs, so do you want to comment anything about how the costs will be divided between H2 '26 and the years '27, '28?

That is very much dependent on the planning and how we -- the details that we are doing right now.

Okay. And then -- okay. So there are 2 other questions relating to the ERP costs. But maybe we take this one that you have booked EUR 6 million cost for H1, sorry, for the ERP project. Is the level expected to be similar for H2?

Well, the level might be close to that, but the details are to be still developed.

Okay. And then have the findings from the first deployment of ERP in Sweden caused any costs?

I would say like this, the findings, it's hard to say exactly what cost -- it's like the learnings we are taking from the findings now. And we should also remember that we're infrastructure critical. So we need to -- when we go into the next phases, we need to be able to deliver on that once. But findings and how do we then both look at the cost, of course, going forward, but how can we also make sure that we make secure deployments when we go to the releases the next releases.

Okay. Thanks. I think those were all the questions related to the ERP that we had. So let's continue with the other ones. So in addition to the buyback program, Oriola has paid EUR 0.4 million when purchasing own shares. Could you describe more detail what kind of payments these have been related to what purchases?

These are mainly related to the incentive programs and also for the board compensations that we pay. So those are the items.

Good. Thank you. And then there's a question relating to the cash position. So you continue to run a sizable cash position while paying meaningful financial costs. When are you planning to optimize this to decrease the financial costs?

We have -- we still have quite a volatility in the cash balance, and that is something that we work on all the time. It's a bit dependent on things that we are cannot affect, but -- and therefore, at the end of the month, it looks quite different than during the middle of the month. So -- but we are working on this. And like I said, we have now discontinued with one customer, the factoring program also to take the interest cost down.

Okay. And then questions relating to the free cash flow. So free cash flow was minus EUR 35 million in H1, driven by the working capital swing and you cite fewer factoring program customers as one driver. So first, is the reduction in factoring participation structural or temporary? Should we expect sold receivables to recover toward the EUR 120 million level or stabilize lower?